EUR/USD surges above 1.1600 due to easing risk aversion following dovish Fedspeak
- EUR/USD appreciates as the US Dollar struggles following the dovish remarks from Fed officials.
- San Francisco Fed President Mary Daly noted that expecting two rate cuts this year is a "reasonable" outlook.
- Traders anticipate that a US-EU trade agreement will be finalized before August 1.
EUR/USD recovers its recent losses registered in the previous day, trading around 1.1630 during the Asian hours on Friday. The pair appreciates as the US Dollar (USD) loses ground amid easing risk sentiment following the dovish remarks from Federal Reserve (Fed) officials. Moreover, Financial markets are now pricing in a September starting date for rate cuts, and Fed officials penciled in two easing moves later this year, according to Reuters.
San Francisco Fed President Mary Daly stated that two rate cuts this year are a "reasonable" outlook, while cautioning against waiting too long. Meanwhile, Fed Governor Christopher Waller said that he believes that the Fed should reduce its interest rate target at the July meeting, citing mounting economic risks. Waller added that delaying cuts runs the risk of needing more aggressive action later.
However, Fed Governor Adriana Kugler said the US central bank should hold off on cutting interest rates "for some time," noting that the impact of Trump-era tariffs is beginning to appear in consumer prices. Kugler emphasized that maintaining a restrictive monetary policy is crucial to keeping inflation expectations anchored.
Meanwhile, traders keep their eyes on trade developments between the United States (US) and the European Union (EU), expecting that an agreement could be finalized before August 1. US President Donald Trump announced a 30% tariff on EU imports, though he expressed willingness to negotiate.
Markets widely expect the European Central Bank (ECB) to hold interest rates steady at its meeting next week. However, markets are still pricing in one additional 25 basis point rate cut later this year. Several ECB policymakers signaled mixed sentiment over rate cuts.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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